Which version of Windows are you using, XP, Vista, other, and 32 or 64-bit ?
What does the New Hardware Detected pop-up describe the device as, or how is that identified within Device Manager ?
Normally it's extract the driver files and, when the New Hardware Wizard pops-up indicating "AXE027 PICAXE USB", change to the required directory, click okay and it all installs. The error seems to suggests you've not got an AXE027, don't have the AXE027 drivers, or have not extracted them to the directory you are telling the Wizard they are in.